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Trump proposes most sweeping tax overhaul in decades

TOM BRENNER/NYT
President Donald Trump while delivering an address about tax reform in the Farm Bureau Building at the Indiana State Fairgrounds in Indianapolis, Sept. 27, 2017. Trump on Wednesday began a full-throttle push to slash taxes, proposing a politically challenging array of tax cuts for individuals and businesses that would constitute the most sweeping changes to the federal tax code in decades.

Posted: 6:00 a.m. Thursday, September 28, 2017

INDIANAPOLIS
—

President Donald Trump on Wednesday began an ambitious push to slash taxes and salvage what remains of his embattled legislative agenda in Congress this year, proposing a politically challenging array of tax cuts for individuals and businesses that would constitute the most sweeping changes to the federal tax code in decades.

Trump, smarting from the latest defeat this week of his efforts to dismantle the Affordable Care Act, cast the tax plan as an economic imperative and the fulfillment of a promise to his working-class supporters to deliver benefits in the form of lower taxes, better jobs and higher wages.

“This is a revolutionary change, and the biggest winners will be the everyday American workers as jobs start pouring into our country, as companies start competing for American labor and as wages start going up at levels that you haven’t seen in many years,” Trump told hundreds of supporters in a speech at the Indiana State Fair Grounds.

But the president offered no measure of the plan’s cost and scant detail about how working people would benefit from a proposal that has explicit and substantial rewards for wealthy people and corporations, including the elimination of taxes on large inheritances and deep reductions in the rates paid by businesses large and small.

After months of secret talks among Republicans, the nine-page proposal produced by the so-called Big Six working group prompts as many questions as it provides answers. Without more details, it is difficult to show how middle-income families will see the most benefit from the tax overhaul — or if it will favor the richest Americans.

On the individual side, the plan would collapse the tax brackets from seven to three, with tax rates of 12 percent, 25 percent and 35 percent, the president said. The current top rate is 39.6 percent and the lowest rate is 10 percent. The framework also gives Congress the option of creating a higher, fourth, rate above 35 percent in tax plan to ensure that the wealthy are paying their fair share.

The plan aims to simplify and cut taxes for the middle class by doubling the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly. That would allow people to avoid a complicated process of itemizing their taxes to claim various credits and deductions. It would increase the child tax credit from $1,000 to an unspecified amount, and create a new $500 tax credit for non-child dependents, such as the elderly.

Provisions such as the alternative minimum tax and the estate tax, a levy on inherited wealth that Trump has derided for years, would be gone under the Republican proposal.

The proposal calls for reducing the corporate tax rate to 20 percent from 35 percent, a shift that supporters say is needed to make U.S. companies more competitive with their counterparts around the world.

A new tax rate of 25 percent would also be created for pass-through businesses, such as partnerships and sole proprietorships, which are taxed at the rate of their owners. About 95 percent of businesses in the United States are structured as pass-throughs, and they generate a majority of the government’s corporate tax revenue.

“This will be the lowest top marginal income tax rate for small and midsize businesses in this country in more than 80 years,” Trump said.

While Republican leaders claim to be united on the tax plan, they must now sell it to lawmakers who have been deeply divided this year. The push began at a House Republican retreat Wednesday at Fort McNair in Washington, where Rep. Kevin Brady, R-Texas, the chairman of the Ways and Means Committee, walked members through the blueprint and talked about the importance of coming together to fix the tax code.

Later, in a hopeful sign for Republican leaders fretting privately about keeping their rank-and-file together, the conservative Freedom Caucus, whose members have derailed the party’s initiatives with hard-line demands, issued a statement of support calling the plan “forward looking,” and pledging to back the party’s budget designed to ensure its passage.

The political stakes are high for a president who is desperate to score a legislative win before his first year in office draws to a close.

Trump, who has eschewed the advocacy tours that his predecessors have used to build support for their top domestic priorities, made a rare direct appeal to voters during his speech, imploring them to call their representatives and senators and demand action on the tax proposal. “Let them know you’re watching,” Trump said. “Let them know you’re waiting.”

In an apparent nod to the harsh political realities the tax plan faces, Trump made an explicit overture to Democrats to support the plan.

“Democrats and Republicans in Congress should come together, finally, to deliver this giant win for the American people,” Trump said.

But behind the scenes, Republican congressional leaders and senior White House officials have discussed bypassing Democrats and using special budget rules that would allow them to get the bill through Congress on a simple majority vote. And Trump paired his scripted talk of bipartisanship with an impromptu threat to Sen. Joe Donnelly, D-Ind., saying he would personally work to defeat the senator’s re-election bid next year if he does not fall into line on the tax plan.

“If Sen. Donnelly doesn’t approve it — because, you know, he’s on the other side — we will come here, we will campaign against him like you wouldn’t believe,” Trump said as Donnelly looked on from the audience.

Conservatives cheered the plan as a bold and long-awaited step to spur economic growth, while Democratic leaders condemned it as an irresponsible boon to the rich. And some budget watchdogs expressed worry about the long-term effect of a plan they said could cost more than $2 trillion over a decade.

Trump, who has broken with precedent for modern U.S. presidents by refusing to release his tax returns, insisted that wealthy people like him would not benefit — an assertion that seemed improbable for a man who runs a family-owned real estate empire and whose children stand to inherit vast sums.

“Tax reform will protect low-income and middle-income households, not the wealthy and well-connected,” Trump said, framing a proposal that would affect hundreds of millions of Americans in terms of his own self-interest. “I’m doing the right thing, and it’s not good for me, believe me.”

Democrats scoffed.

“If this framework is all about the middle class, then Trump Tower is middle-class housing,” said Sen. Ron Wyden of Oregon, the ranking Democrat on the Finance Committee. “It violates Trump’s tax pledge that the rich would not gain at all under his plan by offering sweetheart deals for powerful CEOs, giveaways for campaign coffers and a new way to cheat taxes for Mar-a-Lago’s loyal members.”

As with the individual side, some of the thornier business tax issues remain unaddressed. It will be left to Congress to create safeguards that prevent wealthy individuals from incorporating as pass-through businesses, which would tax their income at a lower rate.

Most itemized deductions, including those widely used for state and local tax expenses, would also be eliminated, along with most of the tax credits that businesses use. However, the plan would preserve the deductions for mortgage interest expenses and charitable giving and keep incentives for education and retirement savings plans, as well as preserve the tax credits for research and development and low-income-housing on the business side.

Another big change for companies would be a limitation of the deductibility for corporate interest expenses, in exchange for the opportunity to immediately expense business investments. The ability to immediately write off these expenses would last only five years, and the limitations for deducting interest have yet to be determined.

Perhaps the most significant, yet murky, shift is the move from a worldwide tax system to a territorial tax system for multinational corporations. In theory, this means that companies would not be taxed on their overseas earnings. But to prevent erosion of the tax base, Republicans plan to impose some form of tax on foreign profits. The transition to the new system would also include a one-time repatriation tax at yet-to-be-determined rates to encourage companies to bring offshore profits back home.

Administration officials did not provide a cost estimate for the plan. Members of the Senate Budget Committee have agreed on a budget resolution that would allow for a $1.5 trillion tax cut over 10 years. Studies of similar plans produced by Trump and House Republicans have been projected to cost $3 trillion to $7 trillion over a decade.

Republicans say economic growth will compensate for lost revenue. Sen. Patrick J. Toomey, R-Pa., who sits on the Finance Committee, said he was confident that a growing economy would pay for the tax cuts.

“This tax plan will be deficit reducing,” Toomey said.

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